Barriers To Entry

Barriers To Entry

In the last decade, more companies were successful in scaling up from a startup to a successful business in a few years compared to companies earlier that took decades to become a successful businesses. For instance, Tata Steel, GE, and General Motors took ages to become a behemoth compared to Paytm, Uber, and Google. In my view, the following could be the reasons:

1)Companies with substantial barriers to entry in the form of investments (license, production plants, and IP) will have few competitors compared to a technology company with minimal entry barriers.

2)Tech firms target millennials who are open to using new products. For example, Uber’s initial success was due to college-going students’ earlier adoption of ride-sharing services.

Other things remaining equal, if market entry is easy, scaling up can be done at low cost, and consumer inertia is low, the growth phase of the life cycle will be much more rapid. However, the same point can be detrimental to companies as competitors emulate the same track. For instance, Yahoo was a market leader in 2000 and became extinct by 2015 after Google seized its market share. I can extend the same examples to Dell Technologies and BlackBerry. However, companies like General Motors and GE are way back to their peak years of growth (in decline) but still exist because of their substantial investments.

In my view, if firms, especially startups, dont create a high barrier to entry, their growth and decline will be steep.